OVERCAPACITY in the aviation sector coupled with a restructuring plan that did not go well has left Malaysia Airlines Bhd (MAB) to continue its debacle, according to Khazanah Nasional Bhd.

In his statement to Parliament’s Public Accounts Committee (PAC), the sovereign wealth fund’s managing director Shahril Ridza Ridzuan said the national carrier has continued trending in the red partly due to the overall conditions in the aviation sector, especially in Malaysia.

“The sector is facing a problem of oversupply, whereby in Malaysia there are four airlines MAS (Malaysia Airlines), AirAsia, AirAsia X and Malindo for a market of 30 million, that more or less translates into 1.7 seats per passenger,” the PAC report quoted him as saying.

In the past five years, Khazanah has injected a “huge sum” into the MAB holding company, Malaysia Aviation Group Bhd (MAG), in line with the turnaround plan.

However, the move did not go as planned and failed to yield the desired result.

MAB was supposed to break even last year and return to the black this year.

“However, MAB had reported losses amounting to billions of ringgit, which resulted in its fair value being unable to support investment cost.

“Hence, the investment that was made during its restructuring had to be written down,” he said.

The government as the 100% owner of MAG had injected funds to allow MAB to continue operations as it expected to generate overall returns, not just solely from the profits of MAB.

“However, the government had to limit the amount of funds that should be injected by Khazanah. Until now, Khazanah has been helping the government identify the other economic benefits if it decides to keep its ownership of Malaysia Airlines,” he said.

MAG contributed to a significant chunk of the impairment taken by Khazanah in 2018, which saw a drastic jump from RM2.3 billion in 2017 to RM7.3 billion in 2018, mainly due to its investment in MAG amounting to RM3.1 billion.

Shahril said in parliamentary hansard, attached to the PAC report, if MAB were to continue operations as is, then a capital investment of about RM1billion a year would be required.

“If you want MAB to have a better chance of doing more on the revenue capture side, then you have to invest more because you have to improve the product, increase your route frequency and improve the overall network effect of the airline. That is quite clear,” he said.

“So, the question is: what is your opportunity cost for the money you invest or don’t invest in Malaysia Airlines?” he said.

Shahril said while the airline was successful in bringing costs down and things were not looking up on the revenue side.

“If we actually look at MAB cost per seat kilometre, it is better than SQ, Thai, Cathay and any other direct competitors.

“The cost is still higher than AirAsia but you can’t do much because AirAsia is a low cost airline,” he said.

Where essentially the plan has fallen apart is actually revenue. The plan did not cater to the fact that so much more supply was going to come into the industry with Malindo, new AirAsia aircraft etc,” he added.

According to Shahril, while Malaysia’s adoption of the open sky policy has worked well for the country in terms of boosting tourist and passenger numbers, it did not bode well for domestic airlines, which faced downward pressure on their pricing, in turn impacting the revenue stream.

“The main problem of MAB is the core passenger business just cannot generate enough revenue with the lower cost base of Malaysia Airlines today,” he said, while adding that MASkargo and the group’s engineering business have been performing well.

Shahril also noted that MAB has lost its domestic market share, which is now dominated by AirAsia.

“If you look at the domestic market today, MAB share is about 20% plus but the bulk of the share now basically is AirAsia,” Shahril said. – October 23, 2019.